A Banker Speaks Up
I am not a LuLaRoe consultant. I am however a consumer, a mother, a wife, a small business owner, and a banker with a bachelor’s degree in Financial Services. I cannot speak to the policies of LLR, their merchant service processing system, or their corporate structure. I was asked to contribute this post to help provide you with some financial knowledge so that you may make smart decisions about your financial livelihood, prevent you from doing something illegal, and to hopefully keep you and your family from financial ruin once the LLR ship does eventually sink to the bottom of the ocean and nestles up next to the Titanic.
First let’s talk about assets and liabilities. On average the consultants that I have purchased from carry an inventory of 2500 pieces. For the sake of averages let’s assume that each piece costs about $15.00 in wholesale value. This consultant would have on roughly $37,500 in whole sale inventory. As of today, when business is good all the inventory is considered an asset. An asset is anything you own that can be converted into cash. Inventory when it can be sold is an asset. LLR mentors often preach that the more inventory you own the more you sell. Assets (your inventory) are only beneficial when it can be converted to cash. Owning the asset does not create wealth.
Liabilities are the things you owe. When you purchase your inventory on a credit card it is a liability. You do not own your inventory until you have fully paid the credit card company for the investment you made into your inventory. Once the debt is paid the liability becomes a true asset available for profitable cash flow for your business.
Time goes by and out of nowhere the ship sinks into the icy cold deep dark bottomless pit of the Atlantic Ocean. Lawsuits form and you have major money invested into your inventory hoping to exchange the assets for cash to make a profit. Then holes happen. Your customers are up in arms about your product and your assets are used as replacements reducing your profits until you receive a refund from the HO.
Instead of selling only the inventory you have you are instructed to keep throwing money at your business to “refresh your inventory” for your customer to increase your sales. This is called a sunk cost. My favorite explication of this comes from Investopedia, “there is an old saying that you should not throw good money after bad.” Once the ship is sinking throwing more money at something is not going to keep it from going under water. To avoid sunk costs you have two options. An example can be seen at the height of the real-estate market. Mr. Smith notices that the market right now is awesome. He buys a bunch of land, gets it cleared and zoned, and starts to build. He is excited about his investment because the 20 homes he is working on is going to provide him with the ability to help his family and his business grow. Everyone was buying houses. Then the housing market crashes. Smith now has two choices. He can choose to cut his losses and not invest any further into the properties and the homes because of the condition of the market. Alternatively, he could also choose to keep building and throwing additional money at the property hoping that the conditions of the housing market improve. If Smith cuts his losses and walks away he hasn’t invested any additional money that he won’t be able to recuperate. If he continues to invest and the market doesn’t improve then he has sunk costs (thrown good money at a bad situation) that he will never be able to turn a profit from.
Assets, liabilities, and sunk costs – don’t throw good money at a bad in hopes of improving a situation. You will be the one on deck while all the first-class people are floating away on their half full life boats.
The following situations apply to those in the queue or those who need to purchase inventory. We know credit cards have been eliminated as a payment option (which honestly you are better off for) but the mentors of the company are making some dangerous suggestions on ways you can come up with additional funds to buy more inventory or fund your enrollment package.
Pull from your savings. This is the only option that was provided that would be both smart and a beneficial financial move for your family. Don’t spend money that you don’t have. If you are neck deep in LLR and you still feel you need to refresh your inventory you should purchase additional inventory from a percentage of your sales, or from money that has been saved as a nest egg of the business. While business investments are important, dividing your business liability and your personal liability are essential. When you operate as a sole proprietor you are assuming all the financial and legal liability to your business. Your income is recorded based on your social security number. If you get sued as a sole proprietor then you, your house, your family, are in financial ruins as a result. When you open a business, you need to weigh the advantages of establishing as an LLC vs a Sole Proprietorship based on the amount of liability this business venture can contain. Do you want to be sued personally, or should the business establishment that you work for absorb the responsibility?
Cash advance on a credit card – Again my biggest piece of advice to anyone is do not spend money that you do not have. Cash advances always come with a higher interest rate than your standard purchase. You will be paying a company more money to fund your purchase, if you do not pay for that purchase in an allotted time the interest rate compounds and you could pay substantially more than your original investment. Cash advances are a terrible idea.
Cash out part of your 401k! For the love of Pete please don’t do this. Every time someone suggests this I try to talk them out of it. This should be the last resort anyone ever considers. When you cash out your 401k you pay a penalty. The last time I personally considered this for medical expenses our penalty fee was 17%. After the penalty fee is deducted you then have to pay state income taxes on your withdrawal. In Wisconsin, this came out to almost 40% between the state tax rate and the penalty fee. If you take $10,000.00 out of your 401k is it worth it to pay an additional $4000.00 for leggings. $4000 that you will never see again. Your 401k should be treated like its money you don’t have. It isn’t a savings for today, it’s an investment in tomorrow
Cash out your IRA! This is just as bad. You established your IRA to help you when you retire. These are funds you are not supposed to touch until you are 59.5 years of age. If you borrow from a traditional IRA you have to pay a penalty for early withdrawal. If you cash in a Roth IRA this money was held post tax. If you withdraw more than you have contributed you will be assessed a penalty by the IRS. Any withdrawal can be considered an increase in income, which could potentially bump you up a tax bracket.
Change your tax deductions. While this option would only benefit you next tax season, reducing your withholdings to zero would hold more money from your paycheck and put it in the hands of the government. When you claim zero you do get a larger tax refund assuming that your actual tax deductions are higher. If you increase your deductions less money is being held from your paycheck each week. While this puts more money into your pocket on payday its highly likely that you will have to pay a substantial amount of money back to the government for not having a high enough withholding for your personal tax liability situation.
Refi your house or open a home equity line of credit. As you pay your mortgage your home gains equity once the value of your property is higher than the amount you currently owe on your mortgage. If you take out a home equity line that amount of money borrowed is reducing the available equity on your home. If you choose to sell your home your HELOC needs to be paid off as soon as the home is sold. When you have a HELOC the bank issuing the line of credit becomes a lien holder on the title of your home. Don’t put the equity of your home on the line to buy leggings. A cash out refi is when you refinance your home at an amount higher than what you owe and take the difference in cash. If the value of your home decreases this option could cause you to go upside down and actually end up owning more than the value of your house.
Invoice yourself through paypal, pay with a credit card, and transfer money to your bank. There are so many things wrong with this that it was hard to find a good place to begin. Let’s start by letting you know that it is not legal! Avoiding cash advance fees from your credit card company is a big no-no. Floating funds (kiting) is illegal. This happens when you write a check to Peter but Paul hasn’t given you the money. You wrote the check knowing that the money wasn’t actually there. Don’t do it. Transactions like these are monitored to your bank and they are reported. There are serious penalties for people who are kiting, structuring deposits, and laundering money. Don’t end up on the check systems list for floating funds – you will have one hell of a time getting approved for a bank account in the future.
Deposit a credit card check into the bank. This option comes with a substantial interest rate. While it seems like the easiest option to be able to “use a credit card to buy inventory” you will pay far more in interest to use someone else’s money to make this purchase.
I understand the pressure of needing your business to work. I understand how hard it is when you have an event and you have only one or two sales. I have been there. I run my own business, I make my own product, and I began with a $200 cash investment. I promise you there is a way to run a profitable business. There is a way to be able to purchase your product wholesale or make your own product and still make money. Please don’t do something illegal, put your house on the line, pay a boat load of fees, or put your life and your family in jeopardy because of the potential for this business to be awesome. Don’t do it because your up line told you it was a good idea. Consult the manager at your local bank, they will give you honest feedback. I know the desperation to be home with your kids, to work for yourself, and to feel like you’re making a difference. I promise you, those feelings don’t need to come with illegal activity and a $10,000 startup price tag.